FDIC taps insured banks for funds as reserves dwindle

The Federal Deposit Insurance Corporation (FDIC) is to levy an additional five-basis-point special assessment charge on depository institutions at the end of the third quarter to boost its fast-dwindling deposit insurance fund (DIF).

Under the final rule published on May 22, all 8,247 insured depository institutions in the US will be subject to the additional 5bp charge based on assets, excluding Tier I capital, as of June 30, with the assessment scheduled for collection by the insurer on September 30. Tier I assets are excluded from the assessment base "to ensure that no institution will be penalised for holding large amounts of capital," the FDIC stated.

After June 30, if the reserve ratio of the DIF is projected to fall close to or below zero or to a level the FDIC believes will adversely affect public confidence, the board can vote to impose additional special assessments of up to a further 5bp.

The imposition of additional charges has been driven by the degradation of the DIF over the course of the past 18 months. As of December 31, 2007, the reserve ratio of the fund stood at 1.22% of all insured deposits, but the failure of 25 insured institutions in 2008 ravaged the DIF, reducing the reserve ratio to just 0.4% by December 31 of last year.

As of May 26, a further 36 FDIC-insured banks had failed, and the corporation "projects a substantially higher rate of institution failures this year and in the next few years, leading to a further decline in the reserve ratio," the final rule reads.

The Federal Deposit Insurance Reform Act of 2005 mandates that, if the DIF reserve ratio falls below 1.15%, the FDIC should implement a restoration plan to bring the fund back up above that threshold within five years. Due to the "extraordinary circumstances" of the current recession, the FDIC has amended its restoration plan timeframe in which to bring the ratio back up to 1.15% from five to seven years.

Based on FDIC projections, the special assessment, in addition to existing assessments, should return the reserve ratio to 1.15% in 2016, a year later than the amended restoration plan target. The 5bp assessment should translate into an additional $5.6 billion for the FDIC coffers, although this is far less than the supervisor had initially hoped for.

When a discussion paper was put out for consultation on February 27, the FDIC proposed imposing a 20bp special assessment on banks' deposit bases, rather than the 5bp charge on overall assets that emerged in the final rule.

The 14,000 responses the insurer received during the consultation stated that the proposed 20bp special assessment "could have a significant adverse impact on the industry at a very difficult time" and one that would be particularly hard for community banks to absorb.

The 5bp charge is anticipated to lower equity capital by 0.2% over the 12 months from April 1 this year to March 31, 2010 for all insured institutions subject to the new assessment. For profitable firms the affect will be even more pronounced, with 2009 pre-tax income falling by 5.1% as a direct result of the charge, while pre-tax losses for unprofitable firms would grow by 2%.

In an uncharacteristic public display of division among financial regulators, the US comptroller of the currency, John Dugan, has attacked the proposal as a stealthy attempt to secure the original 20bp assessments sought by the FDIC, but presented as a more palatable 5bp charge up front with the possibility of an additional 5bp levied later in the year, if necessary.

While the proposed 20bp charge would have been calculated on "each institution's assessment base for the second quarter 2009 risk-based assessment" - that is, each bank's domestic deposits - the final rule imposes a "5bp special assessment on each institution's assets" - that is, the collective assets of the bank beyond the customer deposit pool.

The discrepancy between these two measures - a 5bp charge on institutional assets versus a 20bp charge on the deposit base - is reconciled in the final rule in the following terms: "The FDIC estimates that the total amount collected under the special assessment will approximately equal the amount that would have been collected by imposing approximately a 7 1/3bp special assessment on the aggregate industry assessment base for the second quarter 2009 risk-based assessment."

This shift from assessing deposits to assessing assets is one of Dugan's main objections to the final rule, along with his assertion that the current language allows for three separate special assessments before the end of 2009 - not two as the language appears to suggest.

"I believe the total amount of the three special assessments contemplated by the rule is too high. The interim final rule would have been a one-time 20bp assessment using the normal assessment base of domestic deposits. The revised special assessment in today's final rule uses an asset-based assessment base, but if translated into the normal assessment base of domestic deposits, it results in the following totals: 7 1/3bp for the second quarter, and up to an additional 7 1/3bp each for the end of the third quarter and the end of the fourth quarter. Thus, instead of voting on a one-time special assessment today of 20bp, we're voting on the ability to impose three special assessments totalling 22bp. I cannot support the final rule in its current form," Dugan said.

The situation for the FDIC reserve fund appears to be grave indeed. Even with the new injection of funds, the best the insurer can project is that the special assessment "should result in maintaining a year-end 2009 fund balance and reserve ration that are positive, albeit close to zero".

The supervisor also projects approximately $70 billion in losses due to insured depository institutions failing over the next five years, with the great majority expected to occur in 2009 and 2010. Without the special assessment, the supervisor predicted that the DIF would "become negative" by the end of 2009.

Beyond the new charge for insured banks, on May 20 Congress approved increasing the FDIC's ability to borrow funds from the US Treasury from $30 billion to $100 billion, with temporary authority to borrow up to $500 billion until the end of 2010.

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